IN a new report, “Design Matters,”
the Defined Contribution Institutional Investment Association (DCIIA)
analyzed what is working in defined
contribution (DC) plans and whether
additional legislation could strengthen
these factors further. DCIIA concludes
that plans have the tools they need to
get workers prepared for retirement—
they just need to use them more
vigorously.

The Pension Protection Act of 2006
(PPA) was a watershed moment for
defined contribution plans and has
helped change them dramatically,
DCIIA wrote. Before the PPA, 19% of
DC plans used automatic enrollment,
and today 60% do. Pre-PPA, 9% of
plans used automatic escalation, and
today 80% do. Stable value and money
market funds were the most common
qualified default investment alternative (QDIA), and today 85.5% of plans
use target-date funds for the QDIA.

“The difference between retire-ment savings for workers in planswith automatic features and thosewhose plans do not have auto-featuresis dramatic,” DCIIA wrote. “The DCsystem is already equipped withmany of the tools it needs to driveimproved retirement outcomes. Widerand more consistent adoption of thesetools, including automatic featuresand adequate initial savings rates,could make a significant difference fortoday’s workers.”DCIIA estimates that in planswithout automatic features, a personretiring at age 66 would have fivetimes his final salary in savings,whereas a person in a plan with auto-features would retire with 6. 66 timeshis final salary saved—more than a30% difference.According to DCIIA, the medianinitial deferral rate for DC plans is aninadequate 3%, and there is a needfor more “robust defaults.” The orga-nization believes that existing legis-lation is sufficient to support higherdeferral rates and escalation up to15%. It also estimates that when plansuse an initial deferral rate of 6% andautomatic escalation up to a 10%cap, participants could retire with 7. 9times final salary. If it is increased toa 15% cap, participants could retirewith eight times their final salary.

Further, DCIIA stressed the importance of plans limiting loans, hardship
withdrawals and cash-outs, as doing
so could increase participants’ holdings by as much as 10%. Today, 86.6%
of plans permit participants to borrow
against their DC plan account, with
45.6% allowing more than one loan at
a time—a definite problem, as many
participants default on the loans upon
job termination. DCIIA estimates that
when a plan optimizes auto-enrollment with no leakage, a participant
could retire with 8. 54 times his final
salary. —Lee Barney

Art by Martin Gee

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